Consumer lenders don’t have the option of hunkering down until the inflationary storm hitting the U.S. passes. Many throttled way back when the pandemic first hit in 2020, but they found that wasn’t tenable.
In recalling that period, Charlie Wise, SVP and Head of Global Research and Consulting at TransUnion, says riskier borrows were having trouble getting new credit cards and personal loans as many consumer lenders tightened the credit spigot.
“But the reality was that there wasn’t as much demand for credit among low-risk borrowers,” says Wise in an interview with The Financial Brand. “Super-Prime people didn’t need new cards to the same extent as people with lower ratings and they typically don’t use personal loans even in normal times. So what we saw was that consumer lenders grew more comfortable with lending to riskier borrowers, because that’s who needs credit.”
As it turns out, that period was just an introduction to market conditions in which inflation rushes through the economy.
Consumers’ Need for Credit Returns
Wise says that even in a time when the nation faces inflation higher than that seen since the 1980s, banks and other consumer lenders must still pursue growth.
“The worst thing you can do as a lender is stop originating,” says Wise. “I can promise you that your delinquencies will start to increase pretty significantly if you stop lending, because your denominator doesn’t grow. So then you get additional delinquencies on top of a stagnant or declining base.”
The truth is that “riskier borrowers are always going to be in more demand for creditors than the low-risk borrowers,” says Wise. “The balance that lenders must get comfortable with is between risk and reward and appropriate pricing.”
As inflation has kicked in, many of the consumers who represent potential growth for consumer lenders are under increased financial stress because they are paying more for gas, groceries and rent.
As a result, the de-leveraging seen during the height of the pandemic, has reversed.
“We’ve started to see consumer balances come back in a big way on credit cards, because inflation is driving a lot of wallet stretch.”
— Charlie Wise, TransUnion
People are turning to credit, not necessarily for desperation spending, says Wise, but because “they are getting back to the levels of borrowing we were seeing pre-pandemic.”
Average Non-Mortgage Balance per Consumer Increasing Again After Dropping During Early Stages of Pandemic
|Borrower Types/Timeframe||Q1 2020||Q1 2021||Q1 2022|
|Prime and Above**||$18,831||$18,997||$19,482|
Another factor that is increasing demand for consumer credit is the end of much of the excess liquidity seen during the pandemic. A combination of federal and state stimulus payments, plus the elimination of commuting and other costs for many people, drove many to pay down debt and sock away what they could.
That was then, this is now, as they say.
“That excess consumer liquidity is gone,” says Wise. “The country is now down below pre-pandemic savings levels. Depositors are no longer relying on that and they are back to using credit as they did before.”
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Are Riskier Consumers Worth the Risk?
TransUnion research and other data indicate that the low prime borrower has made a resurgence and represents a potential growth source.
“We have seen upticks in delinquencies, but overall those are still at or below levels that we saw pre-pandemic,” says Wise.
Beyond that, Wise says that wage data from the federal government and other sources indicates that many riskier borrowers are in jobs that have seen wage hikes that outpace inflation, as employers pay up to secure enough labor in the current market.
“The people who you would consider to be at risk are the ones most benefiting from the wage gains,” says Wise, “because people in service industries and other sectors are seeing huge jumps in wages. The higher-risk borrower is being paid somewhat better in this inflationary environment.”
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Outlook for Credit in Continuing Inflationary Environment
One overall conclusion of TransUnion’s research, “Identifying Resilient Consumers During Inflationary Times,” is that delinquency levels will generally not exceed those experienced prior to the pandemic. That should hold under even worst-case inflation forecasts, according to Wise. LINK:
“Furthermore, consumer credit markets will likely see more positive credit behavior once inflation abates,” says Wise.
As Inflation Has Increased Over the Past Year, So Have Serious Delinquency Rates
|Borrower Types/Timeframe||Q1 2020||Q1 2021||Q1 2022|
|Annual Inflation Rate||1.50%||4.80%||8.50%|
|Revolving 90+ DPD||2.60%||1.60%||2.00%|
|Non-Revolving 60+ DPD||3.60%||2.20%||2.30%|
Delinquency rates have been rising, as shown in the table above, for both revolving debt, such as credit cards, and nonrevolving debt, such as mortgages and auto loans. Wise notes that the rise in inflation has hit credit card payments, with consumers who recently opened card accounts defaulting at a higher level compared to 2019.
“It’s not surprising to see a rise in credit card delinquencies, especially when considering many younger consumers have not experienced either high inflation or rising interest rates in their adult lives,” says Wise. He thinks delinquencies will stabilize as this major economic shift becomes better understood.
“At the same time, it is important to keep in mind that, even with these recent increases, overall delinquency levels for most products remain below pre-pandemic levels,” says Wise.
Implications for Buy Now, Pay Later Financing
The basic impact of inflation, rising prices, will help buy now, pay later credit continue to grow, according to Wise. “The rate of growth may not accelerate, but the growth will continue,” he says.
“More consumers are saying, ‘Boy, when I get to the checkout they are offering me four payments instead of having to put it on my credit card. That sounds like a good deal’,” says Wise. “There’s a psychological benefit to have those debt payments made and the debt is gone, versus putting something on the card and as a result you are still paying for it later on.”
In fact, Wise believes that if BNPL had not come along, demand for new credit cards would be higher in the inflationary environment, as people seek more credit to maintain their lifestyles.